csk obalEDGE globaledge.msu.edu The Foreign Exchange Market Use the globalEDGE w
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Question
csk obalEDGE globaledge.msu.edu The Foreign Exchange Market Use the globalEDGE website (globaledge.msu.edu) to complete the following exercises: Exercise 2 Sometimes, analysts use the price of specific products in different locations to compare currency valuation and purchasing power. For example, the Big Mac Index com- Exercise 1 One of your company's esseniial suppliers is located in pares the purchasing-power parity of many countries Japan. Your company needs to make a 1 million Japanese based on the price of a Big Mac·Locate the latest edition yen payment in six months. Considering that your company of this index that is accessible. Identify the five countries primarily operates in U.S. dollars, you are assigned the task (and their currencies) with the lowest purchasing-power of deciding on a strategy to minimize your transaction expo- parity according to this classification. Whi?h currencies sure. Identify the spot and forward exchange rates between if any, are overvalued? the two currencies. What factors influence your decision to use each? Which one would you choose? How many dollars must you spend to acquire the amount of yen required? CLOSING CASEExplanation / Answer
Answer
Exercise 1
1
The Spot exchange rate b/w US dollar & Japanese yen (Yen/Dollar) =122.7
The Forward exchange rate b/w US dollar & Japanese yen (Yen/Dollar) = 122.72
6 month forward rate = -372.5
2.
The Spot exchange rate is current rate prevailing in market but forward rate is rate being offered at time of expiration of the contract though, quoted today.
If, I have to pay or receive a payment today then I will use spot exchange rate but in case I have to get payments or I have to receive payment after the some time then I will use the Forward exchange rate. That will be locked today.
3.
I will choose the forward exchange rate because payment is to be done in six month time. In this scenario, I will go with forward contract rate today that has to be used at time of payment in six month time.
4
In the calculation of amount of US dollar, we have to consider the bid
Exercise 2
Latest edition that is accessible of the Big Mac Index is for January 2016.
Five countries with lowest PPP according to raw index are:
Overvalued currency as per raw index is:
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